The Alternative Financial Services Industry
The American financial system – arguably one of the most sophisticated and efficient in the world – provides financial management tools for millions of U.S. citizens. There are literally thousands of banks, thrifts and credit unions offering accounts to meet nearly every money management need.
Despite this wealth of diversity, there are still millions of Americans that rarely, if ever, use mainstream financial services. Often referred to in financial services circles as the “underbanked”, these consumers choose to manage their money on a simple cash basis. One source, the most recent Survey of Consumer Finances by the Federal Reserve Board, finds that nearly 11percent of families in the U.S. do not have a checking account. Of these, nearly 52 percent formerly held a checking account and almost 55 percent were among the lowest 20 percent of income distribution. More than 56 percent had heads of household younger than 45 years of age and 61 percent were nonwhite or Hispanic. This survey also indicated that the majority of these consumers are underbanked by choice.
Furthermore, William Siegel, former Chairman of the Financial Services Centers of America (FiSCA) the national trade association for the check cashing industry, noted “The 9 percent of Americans without bank or credit union relationships have found ways to conduct basic financial transactions without a savings or checking account. Many have had bank accounts in the past and have found monthly maintenance fees, bounced check charges, low balance fees and other charges from their bank add up very quickly. It is therefore more accurate to refer to these people as ‘self-banked,’ rather than ‘unbanked’.”
It is well documented that the needs of these consumers are steadily being met by check cashing centers across the country. An April 2000 report by Dove Consulting for the U.S. Department of the Treasury revealed for the first time that there were 11,000 check cashing outlets in the United States cashing more than $60 billion worth of checks annually.
According to the Wall Street Journal “…check cashing has become a fast growing small business industry. While the credit crunch forces many banks to close branches and boost fees, the economic crunch is forcing more workers to live from payday to payday. As a result, companies are sprouting all over the country.”
But underbanked consumers are not the only ones using check cashing centers. In the Fall of 2000, FiSCA commissioned an independent research study to examine customer satisfaction levels of check cashing customers in 11 cities across the U.S. A key finding revealed by this study was that 58 percent of check cashing customers had an account at a bank or credit union. In fact, 35 percent reported having both a checking and savings account.
High satisfaction ratings were given for fast, friendly service, easily accessible locations and better hours of operation by an impressive majority of the consumers surveyed. It may be implied from these findings that convenience is a key motivator for these “banked” consumers to use a check-cashing center instead of their bank.
Successful Franchising wrote, “At a bank, customers are required to maintain sufficient funds in an account to cover a check, and/or they’re forced to wait a few days for the check to clear. If the check bounces, the customer’s account is docked, and the customer is assessed a hefty penalty fee. To avoid these inconveniences, many people have decided not to deal with a bank, but instead to patronize a check-cashing outlet. Across the board, customers of these outlets prefer to pay a fee than to wait for their cash, or take the chance of paying a penalty for a bounced check.”
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